The contagion could spread through several channels to other assets, both crypto and mainstream. 90% of the money invested in bitcoin is spent on derivatives, such as “perpetual swaps” bets on future price fluctuations that never expire. Most of these are traded on unregulated exchanges, such as FTX and Binance, from which customers borrow to place even larger bets. Modest price fluctuations can trigger large margin calls; when they are not met, exchanges rush to liquidate their clients' holdings, leading to an accelerated fall in cryptocurrency prices.
Exchanges would have to swallow large losses due to delinquent debt. While the final number of bitcoins in circulation is not expected to be reached until February 2140, it will be more difficult to maintain this system over time, Belsham said. In recent months, the correlation between bitcoin prices and meme stocks, and even stocks in general, has increased. Despite this growth, Bitcoin's detractors have long argued that it's only a matter of time before it drops back to zero.
Meanwhile, there are other types of leverage, where regulated exchanges or even banks have lent dollars to investors who then bought bitcoins. As a result, the Bitcoin unit in these chains will almost certainly continue to have value, due to the computational work and resources involved in maintaining network integrity. This would also require removing the entire Bitcoin network, taking all nodes offline, including those in space, and making it impossible to create new nodes. Recent cryptocurrency buyers who are suffering heavy losses surely don't need to be reminded that Bitcoin has no cash flows or dividends.
Algorithmic traders now perform a large part of the transactions and have automatic “buy orders” when bitcoin falls below certain thresholds. One of the most recent examples of this can be seen in a post by iOS developer Gaurav Sharma, who argues that Bitcoin is actually a modified Ponzi scheme. With Bitcoin, all nodes and miners are free to choose which client they execute, the client with the most combined work automatically becomes the canonical chain. Bitcoin prices have declined in recent weeks, falling more than 6% compared to last week and 26% in the past month.
There seems to be a lot at stake for cryptocurrency to collapse and not just for the staunch who see bitcoin as the future of finance. One of the only plausible scenarios that could cause this is that Bitcoin is banned by all governments in the world, potentially making it illegal to own or use, as is already the case in some countries. Goldman Sachs plans to launch a cryptocurrency exchange-traded fund; Visa now offers a debit card that pays rewards to customers in bitcoins. The Basel supervisors club recently proposed having banks finance their bitcoin holdings only with equity, not debt.
Bitcoin miners who compete to validate transactions and are rewarded with new coins would have less incentive to continue, which would stop the verification process and supply of bitcoins.